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Issues involved: Interpretation of tax law regarding taxation of self-created goodwill as capital gains under section 45 of the Income-tax Act, 1961.
Summary: The High Court of Madhya Pradesh addressed a reference made by the Income-tax Appellate Tribunal regarding the taxation of self-created goodwill under section 45 of the Income-tax Act, 1961. The case involved an individual assessee who retired from a partnership and received Rs. 90,000 as his share of the goodwill. The question was whether this amount was taxable as capital gains. The court analyzed the relevant provisions of the Income-tax Act, including the definition of "capital asset" and the charging section 45 which pertains to the taxation of profits or gains arising from the transfer of a capital asset. Section 48 provides for the computation of income chargeable under capital gains by deducting certain amounts from the consideration received. The court considered precedents from various High Courts on the taxation of self-created goodwill and noted that the majority view was that such transfers are not taxable under section 45. The court emphasized that the charge under section 45 is on profits or gains arising from the transfer, not on the capital asset itself. Additionally, the court highlighted the importance of giving the benefit of construction to the assessee in case of ambiguity in a taxing statute. Ultimately, the court concluded that the transfer of self-created goodwill is not taxable under section 45. The judgment was in favor of the assessee, and no costs were awarded in the reference. In conclusion, the High Court of Madhya Pradesh ruled in favor of the assessee, holding that the transfer of self-created or self-generated goodwill is not taxable as capital gains under section 45 of the Income-tax Act, 1961.
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